Rio Tinto: Metals prices unlikely to rebound this year

ElisabethBehrmann

SYDNEY (MarketWatch) -- Metals prices are unlikely to stage much of a rebound during 2009 because of a large stock and production capacity overhang despite an expected improvement in demand over the course of the year, Rio Tinto PLC
RIO, -2.37%
said in its annual report Tuesday.

"Whilst the precise shape and length of the current downturn is uncertain, economic activity continues to decline and forward indicators suggest any recovery is unlikely to begin until the second half of the year," Rio Tinto said.

"Prices seem unlikely to be able to stage much of a rebound during 2009," the company said, tipping Chinese metals demand growing only at a single-digit rate in 2009.

That compares with the over 20% rates of growth in recent years, and the growth won't be enough to offset a much bigger decline in consumption in other markets, Rio Tinto said.

Prices for base metals plummeted to multiyear lows last year on the back of contracting industrial output and limited access to credit. London Metal Exchange copper prices for instance more than halved, and have since been trading below US$4,000 a metric ton.

The broad pullback has weighed many metals prices below the operating costs of marginal producers, leading to shutdowns across the industry.

But while prices look unlikely to go much lower than their recent rock bottom points, the company said even when a recovery does take place the strength of the upturn may be muted.

"Recessions associated with reduced credit and declines in house and equity values are typically deeper and are longer than other downturns. Deleveraging of balance sheets, the need to rebuild savings and for governments to eventually rein in ballooning fiscal deficits will restrict future rates of growth," Rio Tinto said.

In China, which accounts for one-third of commodity consumption, growth came to a standstill towards the end of 2008, leading to market commentators slashing projections for this year.

And while the central government's aggressive response via a CNY4 trillion (US$585 billion) stimulus package last November targeted metals-intensive public infrastructure spending, Rio Tinto said "there are significant headwinds from weaker export demand. An inventory overhang is expected to hold back any immediate recovery in housing activity."

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